1. Field of the Invention
The present invention is directed to the use of supply chain management system, and in particular, supply chain management systems for high-risk inventory goods that are prone to damage, depreciation in value and obsolescence.
2. Description of Related Art
Manufacturing companies often must carry considerable inventory when goods go unsold due to insufficient demand, or when goods are stockpiled in anticipation of future demand. Such excess inventory tends to tie up valuable capital and is expensive to store and manage. Excess inventory can also have a negative effect on the manufacturing company's balance sheet which depresses its stock price and increases its borrowing costs. Further, the inventory itself may be subject to the risks of obsolescence and damage during handling. Manufacturing companies are also affected by carrying excessive accounts receivable. Accounts receivable are unpaid bills for manufactured goods that have been shipped to and accepted by a customer. Obviously, unduly large accounts receivable can depress the cash flow necessary for the company to survive and will eventually erode company profits.
Factoring is a business method that has been developed to remove the accounts receivable from a manufacturer's balance sheet. Factors purchase accounts receivable at a discount to their present value. The discount serves as consideration for assuming the risks associated with collection on the accounts. In one example, a farmer ships a load of grain to a customer with an invoice and the customer accepts the delivery. The farmer then submits the invoice to the factor in return for an initial payment equal to a percentage of the invoice, such as 80%. The factor then undertakes collection on the invoice and once receiving payment from the customer forwards the balance of the invoice payment, minus factoring fees, to the farmer.
Securitization is a business method that has been developed to remove inventory from the balance sheet without adding to accounts receivable. Securitization is the process of separating inventory from a balance sheet by using the inventory as collateral for the issuance of securities. The securities are then rated and sold based upon the economic value of the underlying assets. The manufacturer receives the majority of the proceeds from the sale of the securities and is alleviated of the risks associated with its inventory of goods. Securitization has been used for such goods as grain, steel and even champagne.
Securitization and factoring, however, have limited usefulness for high-risk inventory goods. One example of high-risk inventory goods are electronic components used to assemble computers and other electronic retail products. Electronic components are often specialized to the needs of a few customers and cannot be readily sold on open exchanges due to a lack of potential purchasers. In addition, electronic components may quickly become obsolete due to constant improvements in competing products and/or changes in compatibility requirements of new electronic systems. Electronic components also have special handling requirements because the components are typically prone to damage from rough handling or adverse environmental conditions such as dust and heat.
In sum, high-risk inventory goods include goods that are not fungible, that are prone to obsolescence or that have special handling requirements. Goods that are prone to obsolescence, such as the above-described electronic components, tend to depreciate rapidly leaving little time for a factor to arrange for financing, or for the valuation and issuance of securities. Also, the high inventory risks introduce uncertainty as to the sale price that can be obtained for the goods. As a result of such uncertain future value, factors and potential note purchasers will demand a much larger discount on the present value of the goods than they would for most commodities. A manufacturer faced with increasing discounts on the current value of its inventory is much less likely to resort to factoring or securitization.
Beyond problems associated specifically with high-risk inventory goods, securitization transactions have been challenged during bankruptcy proceedings. The stock or bonds that are issued during securitization represent the inventory as an entity separate from the manufacturer which is sometimes referred to as a special purpose vehicle, or SPV. Ostensibly, the SPV is inaccessible during bankruptcy proceedings against the manufacturer. However, debtors may try to attack securitizations during bankruptcy proceedings under the theory that the transactions are not “true sales” of the inventory goods. Part of the reasoning of such attacks is that the inventory goods are still under the physical control of the manufacturer, even after the securities have been issued. Doubt about the effectiveness of the SPV in isolating the inventory goods from bankruptcy proceedings can reduce the value of the SPV.
Therefore, it would be advantageous to have a system that allows for the removal of high-risk inventory goods, such as goods prone to obsolescence or having special handling requirements, from the balance sheet of a manufacturer. It would be further advantageous if the goods were removed from the manufacturer's balance sheet using a true sale to a separate entity unlikely to be challenged during a bankruptcy proceeding. It would also be advantageous if the value of the inventory could be ensured for the manufacturer despite its high risk characteristics.